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Uranium: Short, Long and Stocks

Australia | Sep 22 2009

This story features PALADIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: PDN

By Andrew Nelson

Week by week the uranium spot price ticks a little lower, this week it’s down a noteworthy US$2.00 to $42.50 reports uranium market consultant TradeTech. Yet while the spot price continues to slide, the longer term prospects for uranium continue to improve, at least in the eyes of some brokers.

In part, the brightening outlook of uranium is due to the lower levels of supply that the current tight times are causing. But as RBS points out, there is likely to be a sharp increase in demand in the years ahead as increasing nuclear consumption begins to kick in.

The single biggest problem facing the short-term market is the doubt being cast by the imminent release into the market of as much as 1,200 tonnes of UF6 by October 15 by the US Department of Energy. This doubt is seeing an increasing number of spot sellers deciding to take pre-emptive action and sell existing inventories before this new material finds its way into the market.

This move to lower prices has seen a number of buyers take advantage, with a total of five transactions, totalling approximately 900,000 pounds U3O8 equivalent, taking place last week. TradeTech reports that active demand is made op almost entirely of discretionary buyers, with many more still on the sidelines waiting for even lower prices.

This near term price weakness stands at stark contrast to the longer-term view held by RBS, with the broker remaining bullish on the outlook for uranium over the near and medium terms. The broker notes the growth in nuclear power capacity continues to increase each year, with high construction rates being driven by China and Russia, which it expects to continue.

Compounding the benefit that this increasing demand outlook will bring is the broker’s view that current logistical, statutory and operating bottlenecks in key production regions such as Canada, Australia and Namibia, will place significant pressure on future supply plans. In fact, RBS expects the uranium market will move into a supply deficit as soon as 2014 .

So despite the last month’s downward trend in the spot price, the broker sees the underlying fundamentals of increasing supply and tightening demand coming to bear soon. RBS is not only  forecasting an upward trend for the term uranium price, but it also sees returning strength in spot uranium prices as well. The broker expects this trend will soon emerge and will carry on until at least 2011. At that point the broker expects the price will peak at US$95/lb as the market begins to seriously tighten ahead of the expiry of the US-Russian highly enriched uranium (HEU) programme in 2013.

Of the two big Aussie uranium plays (outside the diversifieds), RBS thinks Paladin Energy ((PDN)) offers the prospect of higher returns, but of course, also higher risk.  Following a recent $429m private placement, the broker thinks the balance sheet is in good shape, with FY10 gearing at 16% and the company moving into a net cash position by the end of FY12. The broker also likes the company’s longer-term uranium exposure given its production base is now diversified, with strong production growth and resource upgrades likely.

Paladin will still need to deliver on its production targets, though, and there is potential acquisition risk given the broker sees the company as likely to acquire assets in the next 12-18 months to lock in some kind of production growth after Langer Heinrich Stage 3 comes on-line. RBS’s recommendation on the stock is Buy, with the FNArena sentiment indicator sitting at 0.3. There are just two Buys on the stock including the one from RBS, while there are also five Holds.

Yet while the broker sees Paladin as providing good leverage to the longer-term uranium picture, it also sees peer Energy Resources of Australia ((ERA)) as providing some good leverage to a soon to improve spot. The broker sees the stock as having much less risk on a short-term basis given its current high degree of earnings resilience and strong cash flow.

RBS expects to see expanding margins over the next few years as lower-priced legacy contracts roll off the books and the company is able to take advantage of higher spot and term prices. The broker is also counting on positive news flow over the near to medium-term, as more drill results and details on growth projects are released. That said, RBS has had to push through some downgrades to its near-term earnings forecasts on the back of higher AUD forecasts.

Still, the broker’s Buy call is maintained and it is a call, much like Paladin, that is shared by only one other broker. Other than these two Buys, there are three Holds and three Sells on ERA, which make for a reading of minus 0.1 on the FNArena sentiment indicator.

TradeTech’s mid-term price benchmark has remained unchanged at US$55/lb. Its longer term price benchmark remains at US$65/lb.

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